Business founders love what they do and don’t really think about exiting their business until they are “ready” to retire.
When the right time comes around for an exit, the founder is usually operating a successful business. They have many staff and have become used to the day to day running of the business over a long period of time.
Therefore, it can seem natural for the founder to think that, except for some transition challenges, the founder exiting the business will probably be able to be done as smoothly as normal day to day operations.
What goes wrong with exits and seven ways to deal
1. Planning an exit takes time (a lot)
Most entrepreneurs and founders get a huge amount of personal satisfaction from growing a business. After a few years the buzz slows down as they start to have to deal with making the payroll every month, pressure from competitors, external economic factors, leakage of IP just by being in the marketplace and so on. This tends to happen when the brand equity of the business goes up and customers start coming to you unsolicited.
The years go by and the founder starts looking towards an exit but doesn’t have any clear plan of how to execute it.
Founders don’t realise the exit is just another business project. A big one perhaps but it still has a time constraint, it still needs resourcing and still costs money.
Resourcing the exit is often the biggest issue because the founder simply can’t ask one of their staff to handle this process. Professionals who normally deal with business exits include valuation experts, legal specialists, corporate advisors and so on, most of whom are not usually part of the founders circle of trusted advisors.
Time often literally runs out and founders are reduced to a fire sale of their business at the onset of a significant medical event or some other personal emergency which one day prevents them going back into work.
2. Valuation
Most founders have talked to someone, typically informally, who have given them some idea of what their business is valued at. It’s usually one person. Having operated the business for many years, the founder will have a good idea of the nature and scope of the industry they are in. Typically the founder will have had many conversations regarding which competitors are acquiring others and for what reasons and the valuations of these transactions. Therefore, the founder will usually have an idea which and what type of organisation they will exit with, whether internal family members or existing management takeover or IPO or venture capital or trade sale.
However most founders I’ve worked with don’t have a real idea of how their business can be valued. They are very stuck in the minutia of operating the business and all they see is why a potential acquirer or new manager would not value their business highly.
We read the press and hear about massive valuations, multiples of revenue rather than profit, for small and medium sized businesses.
The things these valuations have in common is a large amount of recurring revenue or some unique operating know how or technology which they lead the world with. The latter group is a much harder group to break into and often these are younguish entrepreneurs with a strong technology background. i.e. not at retirement age.
For everyone else, the best way to drive the enterprise valuation is recurring revenue growth.
Currently the highest valuations at lower revenue I am aware of is for the sale of a business into the “secondary data market”. The Granular Software (agribusiness SaaS) business was sold with $3M in revenue at a valuation of $300M to DuPont. One hundred times revenue ! Farming data and analytics is critical to US farming operations but who knew about the valuation, right ?
The second key part of the valuation is the runway. How much market is still left for the business to expand into ? If your market is saturated with competitors, all you can do is pick up churn customers, dissatisfied with their current supplier plus whatever CPI growth brings you. Your competitors are all in the same situation and this tends to diminish your enterprise value because buyers of your business want to see unlimited green fields, not a runway fast running out.
Once a founder makes the decision to exit, the valuation process will yield clues about how to maximise that valuation. The business needs to be made ready for a change in ownership and/or control.
The founder knows all the key people in their own organisation and is best placed to have those key people help to pivot and exploit more targetted growth or a new strategy. This can significantly increase both the growth rate percentage in revenue and therefore the enterprise valuation, as well as the revenue quantum in dollars. The growth % and amount of $’s both have a multiplying and not additive impact on exit valuations.
3. Recurring revenue acceleration
Product line optimisation – Products and project (i.e. time bound) services need to be switched to recurring revenue where possible, and new product or services added which directly drive recurring revenue
Service line optimisation – Identify new recurring services lines, market and sell them aggressively
New territories – Identify markets in new territories, other Australian States, potentially the highly populous countries in South East Asia
4. Cross-sell and up sell into your existing customer base
It’s much easier and very cost effective to sell more to clients who already like you.5. Digital marketing strategies
You cannot do this yourself. If you haven’t already, immediately implement effective Digital Marketing strategies, they work 24/7 for you. It’s better to outsource because you will never be able to hire in all the capabilities for the breadth of skills that you will need. Measure everything in your marketing and sales pipeline. Face to face business development used to work in the 1980’s. Now you need one of your faces in front of at least 100 customer faces as much as possible.6. Actively align employees to your outcome
Give every single staff member a performance plan to help pivot the business, which they self assess i.e. it’s not work for the founder but the KPI’s perfectly align to the founders personal and business needs.7. Manage the non financial metrics
Pivot your monthly management review to include all the non-financial metrics you often think about but don’t act on. These non financial metrics should take up about half the time of the monthly review. It’s not about the financials, you’ve got those covered. You forgot about your people. Why are key people leaving, why to people decide to work for you ? Are they the same or different reasons ?Planning to exit?
In summary, work out what type of exit you want and how much you want to be involved going forwards. Make a plan to get it done and set a 3-5-year deadline. Fix your reporting and internal feedback systems, your people will help you execute the exit plan, or they will hinder you. It’s 100% in your control. Pivot now to maximise your enterprise valuation, it can’t wait until tomorrow.
Copyright Aspero9 2020